What are Retained Earnings: All You Need to Know

June 9, 2022

What are Retained Earnings: All You Need to Know

Retained Earnings are an important concept in Accounting. The term refers to the historical profits earned by a company, minus any dividends it paid in the past. The word "Retained" captures the fact that because those earnings were not paid out to shareholders as dividends, they were instead retained by the company.

What Are Retained Earnings in Simple Words?

Retained Earnings is one of the most useful numbers taken off the Balance Sheet. It shows how much money the firm keeps after all other payments and expenses have been accounted for. “Retained Earnings” is basically Net Income minus any cash dividends the company pays out to shareholders. On the Balance Sheet, Retained Earnings is added to an account known as “Accumulated Retained Earnings”. These earnings are “Retained” by the company to invest in growth projects, pay off debt, etc.

If a company reports negative Net Income, the account balance of accumulated retained earnings does go down, which reduces total equity.

What is the Retained Earnings Equation?

At each reporting date, companies add Net Income to the Retained Earnings, net of any deductions. Dividends, which are a distribution of a company's equity to the shareholders, are deducted from Net Income because the dividend reduces the amount of equity left in the company. Retained Earnings is nothing but Accumulated Balance of Net Income as per Income Statement. See below an Income Statement example imported to Google Sheets automatically with LiveFlow.

Income Statement:

Income Statement generated by LiveFlow

So what is the Retained Earnings formula?

Retained Earnings can be calculated by taking the beginning balance of Retained Earnings on the Balance Sheet, adding the Net Income (or Loss) for a period followed by subtracting any dividends planned to be paid to shareholders.

Here is the Retained Earnings Formula and Calculation:  

RE = BP + NI (or Loss) − C − S

where:

BP = Beginning Period Retained Earnings

NI = Net Income

C = Cash Dividends

S = Stock Dividends

What Are Retained Earnings on Balance Sheet?

Retained Earnings are listed on a Balance Sheet under the Shareholder's Equity section at the end of each accounting period. See below an Balance Sheet example imported from QuickBooks to Google Sheets automatically with LiveFlow:

Balance Sheet generated by LiveFlow

What is Retained Earnings Example?

Retained Earnings are the accumulated portion of a business’s profits that are not distributed as dividends to shareholders but instead are reserved for reinvestment back into the business. Normally, these funds are used for working capital and fixed asset purchases (capital expenditures) or allotted for paying off debt obligations.

See below the example of how Retained Earnings calculated:

Company Name: Demo Acme

Statement of Retained Earnings

Fiscal Year Ending Dec 2021

Beginning Retained Earnings balance – Dec 31, 2020

$ 520,000

Prior period adjustments:- Correction to depreciation expense

$ (5,000)

Adjusted Retained Earnings – Dec 31, 2020

$ 515,000

Plus Net Income

$ 250,000

Less cash dividends paid to stockholders

$ (6,000)

Retained earnings – Dec 31, 2021

$ 759,000

Are Retained Earnings an Asset or Liability?

Retained Earnings are listed under Liabilities in the Equity section of the Balance Sheet. They’re in Liabilities because Net Income as shareholder equity is actually a company or corporate debt. 

The company can reinvest Shareholder Equity into business or it can choose to pay shareholders dividends. It is generally a sound financial strategy to prioritize accumulating retained earnings for any business that strives for long-term growth.

Use LiveFlow to pull your Balance Sheet with Retained Earnings from QuickBooks into Google Sheets in real-time, download LiveFlow from Google Workspace Marketplace or QuickBooks App Store to track your performance automatically.

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